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Wall Street Breakfast

Koninklijke Ahold N. V. (AHO)

Q2 2007 Earnings Call

August 30, 2007, 8:00 AM ET

Executives

Henk Jan ten Brinke - VP IR

John Rishton - Acting President and CEO and EVP and CFO

Peter N. Wakkie - EVP and Chief Corporate Governance Counsel

Kimberly Ross - Deputy CFO

Dick Boer - EVP and COO, Europe

Lawrence Benjamin - CEO, U.S. Foodservice

Analysts

Fernand De Boer - Petercam

Dan Mcfetrich - Dresdner Kleinwort Wasserstein

Andrew Kasoulis - Credit Suisse

Frederic Van Daele - ABN Amro

Nick Coulter - Morgan Stanley

James Anstead - Citigroup

Barbara Ambrus - Landesbank Baden-Wuerttemberg

John Roeg - ING

Robert Vos - Fortis Bank

John Kershaw - Merrill Lynch

Marc De Speville - Redburn

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the Ahold second quarter results conference call. Please note that this conference is being recorded and shown live on the webcast.

Today's conference call contains statements that are neither reported financial results and nor other historical information. These statements are forward-looking statements within the meaning of the US Federal Securities Laws. The statement on risks, uncertainties and factors relating to them are discussed in more detail in the earnings release which was issued earlier today by the Company and is available today on its website.

The introduction will be followed by a question and answer session and any views expressed by those asking questions are not necessarily the views of the Company.

At this time, for opening remarks I would like to turn the call over your host, Mr. Henk Jan ten Brinke. Please go ahead.

Henk Jan ten Brinke - Vice President Investor Relations

Thank you, operator. Ladies and gentlemen, good morning or good afternoon. First of all, thank you for joining us at the second quarter earnings conference call. I’m here with John Rishton, Acting CEO and CFO, Peter Wakkie, Chief Corporate Governance Counsel, Dick Boer, CEO of Europe, Larry Benjamin, CEO US Retail and Kimberly Ross, our Deputy CFO.

And before we start the Q&A session I’d like to give the floor to John for some introduction. John please.

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

Thanks very much, Henk Jan. Good morning, good afternoon. And thanks very much for joining us. The second quarter has been, I think another busy quarter for us. We are I think pleased with the results which I believe leveled or slightly beat the expectations. If I just run round our figures, for the operating results, in Europe, Albert Heijn, I think had by any standard another very good quarter. It continues to produce strong results benefiting from the strong sales and strong market position that it has in this country, and the reason for which the actions were taken and continues to take.

The Czech Republic, had I think a better quarter than most people were expecting. And I pay tribute to our people in the Czech Republic. They’ve done a terrific job in this quarter in turning the business up, business around. And we have recently announced, last week in fact that we are now focused on repositioning that business in terms of price and we’re taking some branding activities in the Czech Republic as well in the future. But that business, certainly in the second quarter, had some good results.

In the USA, Stop & Shop and Giant-Landover remained on track with the VIP roll out, and I think again the results there were of no surprise and have had… in line with expectations. As we said in our release our Value Improvement Program continues to roll out on track. I’m sure as we get the questions, Larry will be pleased to fill you in with some more details on that.

Giant-Carlisle had, what I would describe as an exceptional quarter, a very strong result there, and I’m truly very pleased with that. I would describe it as exceptional.

In terms of the corporate center costs, we continue to reduce those costs as you see, with the two-phased [ph] actions to bring the cost base down there and we are well on track to harden [ph] the costs in the corporate center.

Within the quarter, we completed two major disposals, US Foods and Poland and you can see from the release, the profitability and the cash impact that both disposals had. During the last week we have completed the €3 billion reverse stock split and the capital repayment. And as you have seen, today we have announced further €1 billion share buy back planned for later this year.

In terms of interest expense, we have reduced our guidance quite significantly from earlier this year. I should remind you that at the start of the year, I did give an indication that the guidance that we had given was clearly independent on the success of the disposal program both in terms of value and timing. Total revisions in the interest expense shouldn’t come, I think as too much of a surprise but you can see that the new guidance we’ve given of between €320 million and €340 million for the year, which reflects simply the interest expense and the interest income that we anticipate to get.

I think that’s probably enough by way of introduction. And I’m very happy to take questions along with Dick, Larry, Peter and Kimberly.

Question and Answer

Operator

Thank you. [Operator Instructions].

Our first question comes from Fernand De Boer of Petercam. Please go ahead.

Fernand De Boer - Petercam

Yes, good afternoon, Fernand De Boer of Petercam. I have one question with regard to the US. In the first half you closed down a number of stores, first Stop & Shop and then Giant-Landover area. Could you just give us an indication of how much more stores are you going to close down there?

And the second question on this is that actually you closed down already the stores in the first quarter but you took charge in the second quarter. Going forward can you expect more restructuring charge there?

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

Thanks for that question. Let me give you a couple of comments, and then I’ll ask Larry to comment further. Typically, if I take you back in time about a year ago, we talked about the need to study more carefully our underperforming assets and the time that was taken has been, some of our loss making businesses. And while that was correct, it also included much more close reviews of our stores and all of our assets to make sure that we took the appropriate action at that level of… well at the business level. My observation would be that in any business there's a need to prune various parts of the business to grow various parts of the business. So, what Larry and the team in the US have been doing, and in particular, is looking at the store portfolio more rigorously and perhaps more vigorously than we have done in the past.

And what I have said, at the start of Q2 was that we expected a restructuring charge of around €20 million and I think in the US, the charge was €19 million and then we had €4 million, if I remember correctly in the center. So in total the restructuring charge of the business was €23 million, of which €19 million primarily related to the US activities.

For Q3, I would anticipate that the restructuring charge will be slightly smaller, and I am going to say around about €10 million or lower than it was in Q2. It does need to… I do need to sort of give myself a little extra because of the accounting [technical difficulty], which are stringent than they were historically, which means that some of the restructuring charges may swing from one quarter to the next. But I think that Q3, I am looking at restructuring charges of not more than €10 million.

Larry, maybe you want to talk a little bit more about the stores.

Lawrence Benjamin - Chief Executive Officer, U.S. Foodservice

Yes, just to clarify the facts, year-to-date we've shut down 17 stores. And we had a first wave, which I think was the first quarter where we are referring to which was five Giant-Landover stores and two Stop & Shop stores and then more recently, which was the cause of the charge, in Q2 we announced the shutdown of nine stores in Southern New Jersey and one in New York. What that effectively did is it removed us entirely from the Southern New Jersey market. We figured on an ongoing basis, we continue to look at opportunities to watch [ph] our stores or if it makes sense, every time we have a troubled store, we do an evaluation of whether it can turn around with investments or whether we should exit. And I think we are going about it in a very deliberate thoughtful way. Store rationalizations have always been part of Stop & Shop's history. This is not new. There is perhaps a bit more in the past quarter, but if you will look back at 2006, there are also a number of store closings. So it's just a normal part of our trimming of our portfolio as we move forward.

Fernand De Boer - Petercam

Could you also say something about store remodeling, since Giant-Landover has been now completely stopped or it might pick up again?

Lawrence Benjamin - Chief Executive Officer, U.S. Foodservice

Remodeling continues to play a key role in the turnaround of Landover. As we've talked about in the past, Landover has… all the stores in our US portfolio under the banner [ph] and remodels have been and will continue to be. Both remodels and replacement stores will continue to play a central role to the turnaround of Landover.

Fernand De Boer - Petercam

But could give you us an indication of how many stores you did in the first half?

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

I don’t think we have given that guidance in the past. So, it was very limited this year, but we're continuing to evaluate opportunities to invest in remodels of the many [ph] stores of Landover.

Fernand De Boer - Petercam

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Dan Mcfetrich of Dresdner Bank. Please go ahead.

Dan Mcfetrich - Dresdner Kleinwort Wasserstein

Good afternoon everyone, Dan Mcfetrich from Dresdner. Can I ask some questions, Larry, on the VIP please, really just trying to get more flavor to the customer perception in-store, how that’s moving and maybe more recent data on that in terms of what tracking [technical difficulty] you see relative to the competitors. And also, could I add on that what they are saying on the SKU rationalization, which goes with the VIP?

And my second question is on the global retail cost savings target of €500 million. I know that’s back-end loaded into ’08. Can we have an update on your thinking on that and may be timing wise? Thank you.

Lawrence Benjamin - Chief Executive Officer, U.S. Foodservice

This is Larry, I will answer your question about VIP and maybe perhaps bring up some additional questions, and I will get to them, I will give you just sort of a quick update on VIP as a whole in the second quarter.

As we stated in the press release, VIP is very much on track. During the second quarter, we launched four more categories, cereal, pet, water/juice and cookie cracker. Cookie cracker actually was launched just in August. And at the end of the quarter we were about 25% of the store in about third of our total VIP categories, so we continue to move that forward in a very thoughtful disciplined way.

As we mentioned in the press release, and I think your question referred, we have seen encouraging developments in consumer price perception, price reduction, awareness, unit sales and customer trips. And we're particularly pleased with that progress in produce. As you recall, produce was the first category that we launched back in September of 2006. We have been very pleased with our results there, across the board.

And just as in produce and all the other categories, to answer to your question about SKU rationalization, we've continued to reduce the assortment typically in the sort of 20% of SKUs range. It remains a fundamental part of the VIP rollout. It’s in fact one of the key differences between the VIP rollout at Stop & Shop and Landover versus Albert Heijn, where assortment reduction is very central to the simplification of the categories and the restoration of clarity of pricing.

So overall, we are on track and we continue to stand by… previously we had given guidance that we expect to be round about 50% of the VIP project by completion, and we stand by that we will be at least 50% by year-end.

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

On the cost savings, if I could jump in on those. Again, I think, I would describe that as, that we are on track and comfortable with the progress we are making. As we've said before, this covers a large variety of areas. It’s being driven by simplification and improvement. And if I use VIP as the example of that, it’s about reducing the SKUs, it’s about reducing our inventory, it’s about focusing on what’s important for our customer and we are making good progress. We invest in shrink, we invest in… the reduction in administrative costs, we invest in changing the services that we offer. As you are aware, in some of our stores in Stop & Shop and Landover, we've done the same thing where we sell all of our [ph] seafood in some of the stores. We have a very targeted approach to that. But my summary is, we are making good progress on the cost reductions, we're simplifying our business and I am confident that we will hit the €500 million target by the end of 2009, as you can imagine.

Dan Mcfetrich - Dresdner Kleinwort Wasserstein

Great. Thank you. Can I just ask one quick follow up on VIP, please? In terms of the SKU rationalization can you elaborate a bit on how the supply negotiations are going, given obviously, you are now concentrating your volumes on fewer categories.

Lawrence Benjamin - Chief Executive Officer, U.S. Foodservice

As your question implies, the SKU rationalization's a critical component of the supplier negotiations. And we are reducing not only the number of products we carry, but in many categories the brands that we carry. It’s an integral part; I think that we have found our suppliers to be very supportive. And they are looking for the same thing we are, which is growth. As we expected, the VIP program continues to produce growth for them, and it continues to give us a lot of leverage in our negotiations.

Dan Mcfetrich - Dresdner Kleinwort Wasserstein

Thank you, very much.

Operator

Thank you. Our next question comes from Andrew Kasoulis of Credit Suisse. Please go ahead.

Andrew Kasoulis - Credit Suisse

Hi, guys. Just on VIP… and I suspect if the answer is no, then my second question is, why not… can you give us the numbers or would you give us the numbers on exactly what’s happening in the stores. I hear what Larry is saying about price perception, unit sales, trips, baskets et cetera, et cetera. But when you saw things like what is the like-for-like uplift, what’s happening to basket size in terms of numbers, what do the customers really think about prices versus what you have actually done to prices in the shops? You have had many, many months now in this program, you are well into it. Why can’t you begin to quantify some of the change rather than give us qualitative statements?

Lawrence Benjamin - Chief Executive Officer, U.S. Foodservice

I think the subject comes up with each quarter, and we've said, we will work diligently to try to develop ways to clarify what we do with VIP. At the same time understand that VIP has been in a highly competitive environment. The rollout of each of these categories is a closely held secret until literally the eve before which we are implementing them. We are very careful about keeping the information confidential. And I think internally what… our view is also that a lot of the measures [technical difficulty] that we use are difficulty to report quarterly. But I think that what you can look forward to is that at the end of the year, we'll be in a position to provide a more quantitative view of our progress on VIP. Quarter-to-quarter, since it's individual categories, very specifically the perceptions for it are not done necessarily on a quarter on calendar, it's more difficult to do than I think on an annual basis. We work very hard to try to figure out ways that allow you to understand my point. In the mean time we continue to provide qualitative direction with the metrics we do work out both the qualitative metrics of customer perception and quantitative measurements of units in customer trips. We are pleased with where we are and we are continuing to track those very carefully.

Andrew Kasoulis - Credit Suisse

And will you or do you propose to be able to give us like-for-like in specific product categories… not produce… I mean if you can give us a produce like-for-like figure across a set of VIP stores versus the rest of the stores and non-VIP stores, I mean something like that presumably, isn’t that competitively sensitive?

Lawrence Benjamin - Chief Executive Officer, U.S. Foodservice

I think we've got a very keen understanding of what you’d like and a very keen understanding of what we do is competitively sensitive or internally sensitive. And we’ll do our best to come up with metrics that will ultimately provide you with additional clarity.

Andrew Kasoulis - Credit Suisse

Okay. Just one more question if I may, changing tracks slightly. You said that you spent some promotions in Giant-Carlisle. Is that a permanent change of policy or is that something that you see as temporary and why did it arise in the first place? Was it a change in market conditions or was it reactions to something else?

Lawrence Benjamin - Chief Executive Officer, U.S. Foodservice

I think that… we talk so much about our pricing and promotions as sort of a Giant driven [ph] and I think Albert Heijn is established where clearly that pricing and promotional strategy, what we call VIP repositioning is a lifelong activity. It’s important to note that Carlisle is very much in a constant mode of adapting and adjusting it’s pricing to meet competitive conditions. It is clear in the second quarter, I think we had very favorable market environment. We did promote less in the second quarter. It's reflected in a spike in the operating income, but also reflected in the slightly softer ID sales number, and we continue to see variations in competitive activity. We do know that coming up in the second half of the year in the Carlisle territory there are a number of new competitive store openings that we are watchful of. We are used to that, we're continuing to prepare for it. So really a lot of this is what’s happening in the overall market, what’s happening with the competitive environment. And those factors are not constant. They are variable from quarter to quarter.

Andrew Kasoulis - Credit Suisse

Okay, but does that mean that Giant-Carlisle’s policy varies quarter by quarter or does it mean that it will adopt some sort of VIP approach as per Stop & Shop and Albert Heijn at some point?

Lawrence Benjamin - Chief Executive Officer, U.S. Foodservice

All of our businesses are constantly responding to changing consumers and competitive conditions. There's nothing unique about Carlisle. I think what was somewhat unique about the second quarter is we had a series of favorable marketplace conditions that provided for what was, as John said, a really exceptional quarter from the profitability standpoint.

Andrew Kasoulis - Credit Suisse

Okay. And very lastly if I may, you’ve given us timely [ph] guidance for this year for the interest charge, bearing in mind how difficult it is to set the interest charge for the next year with the very different interest bearing debt instruments. Are you going to give us, at some point guidance for next year or at least an indication of how you might refinance some of the existing debt?

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

Let me ask Kimberly to talk a little bit about that.

Kimberly Ross - Deputy Chief Financial Officer

We would expect our interest expense to come down a little bit next year due to the benefit that we'll received from debt [technical difficulty]. However we’re not prepared to provide the guidance at this point. Later in the year, we will give you more color on it.

Andrew Kasoulis - Credit Suisse

Okay, thank you.

Operator

Thank you. Frederic Van Daele from ABN Amro has our next question. Please go ahead.

Frederic Van Daele - ABN Amro

Yes, good afternoon, a couple of questions. The first one is on your working capital position. I noticed that your inventory level is actually already quite low. Is there much scope for further improvements and are you happy to provide a target on how much cash you’re going to get out of your working capital on an annual basis? That’s my first question.

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

Okay, I think on working capital we’re making good progress with that. As I've said a couple of times in the past, we've introduced a specific part of our management incentives around working capital a year ago. And what I observed is that we made some good progress in some of the financials, if I can describe it that way. Some of the structural changes that we need to make to our business clearly take longer, again, as I think I mentioned last year. But what we are starting to see now is, I think, almost without exception, improvements in inventory performance around the group. And I would expect that to continue. And Larry’s already talked at some length on VIP and the SKU reductions and the improvements in shrink, and we are reducing our inventory quite significantly as a consequence. So I am optimistic that we could continue to improve our working capital into the future and certainly we target the balance to do that.

Frederic Van Daele - ABN Amro

Okay, so at this stage no quantification, I take it then?

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

You are right.

Frederic Van Daele - ABN Amro

Second one is on the… second question I had was on the tax rate. How long do you expect it to remain at these levels or are you now also happy there maybe to provide a little bit more color given US Foodservice is gone now?

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

I am very glad you asked a question on tax because that gives me an opportunity to ask Kimberly to answer you.

Kimberly Ross - Deputy Chief Financial Officer

John loves tax questions. We're largely dependent on the mix and that we are now [ph] going forward. This quarter we did see a more normalized tax rate and we really expect it to be around these levels barring any significant, unusual movements that under IFRS would cause the tax rate to go either up or down.

Frederic Van Daele - ABN Amro

And are there still any tax losses left after the disposal of US Foodservice?

Kimberly Ross – Deputy Chief Financial Officer

Yes, we do have some tax losses left and we will provide those numbers in our annual report at year end.

Frederic Van Daele - ABN Amro

All right. And my final question was on the disposal proceeds. Your company added €375 million on Poland and €7.1 billion on US Foodservice. I take it that excludes the €281 million cash which you mentioned in your given statement in a little bit more detail. Is it right?

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

You've given [technical difficulty] I’d love to really understand the question.

Frederic Van Daele - ABN Amro

Well, if you get $375 million plus $7.1 billion, do the proceeds you get, is that including or excluding the cash positions of the business that you are actually sold.

Kimberly Ross – Deputy Chief Financial Officer

Those are the enterprise values, the numbers that you are providing. Those numbers are subject to normal adjustments including the cash adjustments that go with the business.

Frederic Van Daele - ABN Amro

So they are excluding the cash positions?

Kimberly Ross – Deputy Chief Financial Officer

Correct.

Frederic Van Daele - ABN Amro

All right. Thanks.

Operator

Thank you. Our next question comes from Emily Chang [ph] of Lehman Brothers. Please go ahead.

Unidentified Analyst

Hi, good morning. Thank you for taking my question. I just had a… two really… question around the withdrawal of some interim SEC reports. I just want to be clear. You still have a reporting requirement under the existing bond. Is that correct?

Kimberly Ross – Deputy Chief Financial Officer

No, we would not have a report our SEC reporting requirement.

Unidentified Analyst

Under the existing bond, you do not?

Kimberly Ross – Deputy Chief Financial Officer

No.

Emily Chang – Lehman Brothers

Okay. And then, sorry…

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

Go ahead, please.

Unidentified Analyst

Okay. And then the other question I have is that what your other options are in terms of the existing debt, in the sense, retirement or payment of debt?

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

On the debt, what we said, two steps that we announced our recovery would be, we're going to reduce our gross debt by $2 billion. And the objective of reducing debt by $2 billion was to help enable us to get to investment grade which under [inaudible] we have from both Standard and Poor’s and from Moody's. Moody's just recently upgraded us in the middle of July. We haven’t provided specific details on that debt reduction. But what we have said is, we will take up opportunities to reduce debt where we see those opportunities. We have provided a debt maturity schedule and clearly one of the biggest pieces of debt maturity that we have coming up is the 2008 bond in the middle of next year. But we look at opportunities to take out the debt as they come along. And clearly in the current market that’s… there may be some opportunities that are constantly coming out [ph].

Unidentified Analyst

Great, that’s very helpful. Thank you.

Operator

Thank you. Nick Coulter of Morgan Stanley has our next question. Please go ahead.

Nick Coulter - Morgan Stanley

Good afternoon. Just three quick questions on the share buyback, the Czech Republic and then on ICA. Firstly, for John on the share buy back. Just give a few more detail around the buyback, when you think it will commence, whether it’s a traditional buyback and what sort of timeframe do you foresee, please.

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

Yes, on the share buyback, I would expect that we would look at a normal share buyback and I would expect that we would do that this year.

Nick Coulter - Morgan Stanley

Okay, thank you. And then on the Czech Republic, obviously it's tops in the black this quarter, and you are referring to not quite an exceptional performance but a very strong performance ahead of a repositioning. I think the Street has generally minus ten in for earnings for the Czech Republic this year. Should we now anticipate that the management has progressed enough with the operations that it will be in the black for the rest of the year or should we anticipate that it trickles back in the red?

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

I think you summarized the positions very well. We had a very good quarter, the management, as I said in my introduction has done a terrific job there in focusing on the business and driving performance. And as I also said, we're looking at repositioning that now, which will have some impact through the balance of the year. But maybe I'll ask Dick to talk a little bit about where we are in Czech and what’s going on there.

Dick Boer - Executive Vice President and Chief Operating Officer, Europe

Thank you, John. I think if you look at it, we changed the management team almost completely last year. We've focused on of course the existing businessed in Czech Republic very well. Operational excellence, very good [ph] store operations in the first half year. And as we announced yesterday and started last week is the repositioning, first of all of the supermarkets, so we are doing exactly as we did in Albert Heijn in '03 to get the prices closer to the mid level of the market. And that of course will have quite an impact for us on hopefully on sales because we all want to continue the gross we see with the identicals we achieved.

Secondly, we work of course on the rebranding. It's another point we also announced yesterday that finally in the coming years, we will grow to one brand company with a multi product organization, little like the Albert Heijn organization in Netherlands. We are pleased with the strong sales also in the first half year. And I think the guys are doing over there nice things [ph] for the business.

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

So in total, as you know, we don’t give guidance but as in total, our guidance for the full year remains unchanged, which is between 4% and 4.5 % on an underlying basis.

Unidentified Analyst

Okay, thank you. And finally on ICA, is it possible to just aggregate the underlying contributions, obviously looking at the company’s result we did see an underlying margin contraction. If you could, if you would be able to split that out, I guess there must be some capital gains or of the amount based on [ph] the reported number. Thank you.

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

Yes I think what I would do is I would refer you to the ICA press release, which try to detail out some of that information. If I talk more generally about ICA, and the things to come, ICA is a good business, it has gone through some transition where, if I split it into three, the Baltics [ph] are doing very well sales wise and improving their profitability, which is terrific. Norway which has been an issue for us a little while now is subject to intense amounts of tension [ph], a new management team and a major turnaround program. Personally I am confident that we will turn Norway, Norway’s results around, but that’s not going to happen in my view overnight.

And in Sweden, we have a specific issue in terms of the opening of a major new distribution center in Helsingborg, which means that we have set up costs and duplication of warehouse costs for a period of time. And that work is likely to [inaudible]. But if you look at the ICA release, you will see a break out of some of the capital gains and the future profitability of the operations.

Nick Coulter - Morgan Stanley

Okay. And just a quick one to the finish. On the central cost, obviously the underlying, with $16 million this quarter, which I think is just below or better than expectations, should we annualize that, that $16 million or is there a reason that it was particularly good this quarter. Thank you.

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

In terms of core costs, we announced this fall, it's nearly a year now, we’re making very good progress, as I said in terms of our efforts to reduce some, in fact to halve the costs. And as I said at the year end that the original plan to halve the costs by 2000… by the end of 2008 we were confident we could think of that. The cost reductions clearly reflect two major elements. They reflect a significant reduction in consultancy costs and a significant headcount reduction. So the number of full time heads have been reduced by close to 36% during the year… during the last year. So, the actual run rate we’ll be seeing in the second quarter is not unreasonable.

Nick Coulter - Morgan Stanley

Excellent. Thank you very much.

Operator

Thank you. Chris Alding [ph] of Bernstein has our next question. Please go ahead.

Unidentified Analyst

Hi, Good afternoon. Couple of questions. I wonder if you could talk a little bit about the Dutch business. Specifically what made it such a weak quarter? And then secondly, how sustainable do you see the current margin levels or what was direct to the margin levels.

The second question is, just if you could give a quick update on the remaining disposal processes and whether it is also fair to assume that any additional funds are likely to be returned to shareholders as well given today’s announcement that the additional cash is so far going to be returned to shareholders?

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

Well, I'm going to ask Dick to talk about the Dutch environment because he absolutely might like to do that.

Dick Boer - Executive Vice President and Chief Operating Officer, Europe

I think if you look on the second quarter again, the identical sales growth is on a higher level. Of course, we think, at this moment, let's say all the things we did on the last years in this growth, which are all the identicals but also of course take off, from the common stores [ph] last year also helps a lot. And that’s a benefit we get off. So in growing identicals and with the acquisition to lower our cost again, which is I think a positive thing for the business.

Secondly, till now the economic situation in Holland was quite favorable. And as you maybe have read and noticed that inflation is still quite low in Holland. But we also get the pressure now on that side, from that perspective and consumer confidence will be affected by that, we are sure about that. So as always, retail is a daily business, and it has to do a lot with how customers are shopping, how to deliver in the future in the economy. And so, but in general I think, and that’s a good thing of all time. We are the market leader and we set the tone in the market and that’s of course why you see the effects back in our results.

Unidentified Analyst

Okay. And just to pick up on that the second part of the question, now that it's sort of sustainable to going forward, obviously, one part is the consumer side you talked about, but on the competitive side, do you see any change in the competitive nature over the small players in the Dutch market?

Dick Boer - Executive Vice President and Chief Operating Officer, Europe

As I said, of course the small players in the Dutch market, I mean, the C1000 which as you also noticed suddenly had lower identical sales but it's still a big chain in the Netherlands and together we have an enormous market share of course in this country. And after that you get a lot of smaller players… regional players who are strong family owned and of course, our… the Company like ours. So, competition… and a lot of competition is now working on integration of stores they bought from previous shake-up. So, you see that market is still inward looking I would say… a lot of competitors are looking and organizing themselves again. And some of them are growing fast like Jumbo and that’s also the model of course, to grow fast. But on the other hand, I think everybody is also having to freshen on the supplier side and how to transfer the increased commodity prices into consumer prices. So I wouldn’t say there is much change in this year on the competition side.

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

Just before… after the disposal… just to detail the quarter because I think the previous question I mentioned $16 million, that was for the total quarter strength of the core costs… the $22 million [inaudible] referred to is the core cost of $22 million.

In terms of the disposal, I'm really delighted with the process of Poland and US Foods. Not only in terms of the timing of those, which clearly was good, and the amounts, which clearly were good. So kind of hidden benefits, just in passing is, it means that Larry and a number of other folks can now concentrate on the retail business. So, in terms of retail review about simplifying our business and focused to this disposal of US Foods, means we've got to focus now on the U. S. on the retail business which is in itself very valuable for us.

In terms of the remaining disposals, look, clearly the change in the market environment in the last four or five weeks doesn’t help. I am still hopeful that we will succeed in the disposal of Soft [ph] and Jim, you will see. But as I have said on a number of occasions, what we are trying to do here is to maximize the value that we bring in the disposals. We don’t have to sell these businesses to raise cash. We've got quite a lot of cash. We don’t have to raise these businesses for anything specific or specific date. So, the earlier guidance that I had given was that we were very confident we would sell these businesses this year. We are still hopeful we will sell Soft this year; we are making very good progress there. Jim, we will see where we get to.

In terms of what do we do with the proceeds. Through the course of this, we looked at the proceeds quite carefully. So, when we started with the retail review we set $2 billion for debt reduction and that was the amount, would get us to investment grade we believe. We said $2 billion for shareholders. But as the divestment process proceeded we increased that $2 billion to $3 billion and as you see today, having completed the divestment process and looking out into the future, we felt comfortable enough to increase the $3 billion to $4 billion. You shouldn’t read into that automatically any cash that comes in will automatically go to a shareholder return but you can be assured that we will consider very carefully what we do with that cash, and we'll make a considered choice.

Unidentified Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from James Anstead of Citigroup. Please go ahead.

James Anstead - Citigroup

Good afternoon. Just two or three quick questions, please. Firstly, a more general one on the U. S. consumer. It sounds as if the second quarter generally was relatively positive quarter in terms of consumer confidence. Your customers considered [ph] the environment not particularly irrational. Perhaps Larry could comment on whether there have been any changes at all in that since the start of the third quarter. I know you won’t want to say too much, since this is a second quarter call. But I guess you are five or six weeks now into the third quarter, and perhaps you would just let us know if there have been any kind of significant changes in that period?

And two other quick questions is what I thought is the case. Firstly, now you’ve got investment grade credit rating back and you've clearly got the disposal proceeds coming in and as you said you’ve got a very healthy cash position. Is there anything at all, in the way, standing in the way of resumption of the regular dividend payment? That’s one question.

And finally, I think Peter. Lucky he’s there. I’ll give him one question. I know you sold U. S. Foodservice, but I remember you've still got potential exposure as this legal case that’s discussed a bit in the press last year. I’m not sure I’ll ever see a press release if that gets settled, but I just wanted to check what the latest scenario was on that situation, whether the U. S. Foodservice legal liabilities are under control, whether that’s been extinguished and what progress you’re getting there?

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

Fancy [ph] your questions. Shall we take them in the order that you gave them? Maybe Larry could make some comments?

Lawrence Benjamin - Chief Executive Officer, U.S. Foodservice

Yes. With respect to your question about consumer trends. I won’t comment on the third quarter but I can comment on the second quarter. You'll recall we used the word “robust” to describe the market conditions in the Northeast in the first quarter. We’re not using that term to describe market conditions in the second quarter. We were pleased with our own performance but in terms of commenting, we are able to measure the entire grocery and also all channels that sell food in each of our major markets on a quarterly basis. We definitely saw a slowdown in growth virtually across all of our Northeastern markets in the second quarter. In the first quarter the growth was quite strong on as we talked about. So despite a slower growth in the second quarter, we were generally pleased with our ID sales performance. Because of that, it’s a subject of much speculation. But certainly some of the potential root causes that existed in the second quarter are continuing into the third quarter. Its direct impact on overall retail channel performance is yet to be determined.

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

And on the dividend question, I think, as you’re well aware we look out for three criteria on dividends, balance sheet strength, business performance and outlook. Before we consider each of those and we’ll consider each of those aspects and we’ll make a decision about dividend reflecting those elements in due course.

Peter, do you want to comment on US Foods?

Peter N. Wakkie - Executive Vice President and Chief Corporate Governance Counsel

Yes, I think you're referring to the case that’s pending in Connecticut and we are continuing to defend ourselves in that case. And as we have indicated before we believe that we have a good defense in there. And that’s all I want to say about it.

James Anstead - Citigroup

Okay. Thanks very much.

Operator

Thank you. Barbara Ambrus of LBBW has our next question. Please go ahead.

Barbara Ambrus - Landesbank Baden-Wuerttemberg

Hello. Thank you. Actually most of my questions have been answered, but one is left. Could you please comment a bit about Schuitema? I mean there was another rather weak quarter. Could you tell us about your reasons and about your outlook for the business? Thank you.

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

I think, I'll ask Peter to talk a little bit about that first.

Peter N. Wakkie - Executive Vice President and Chief Corporate Governance Counsel

Well, Schuitema, as you have seen and as also been commented on by the CEO is in a transition year. They are doing two things which I think will have a positive influence on the years to come, number one. They are standardizing, maybe that’s not the correct word, but standardizing their portfolio of stores, and take back stores from franchisees which do not really produce good results. So they are looking at their portfolios very carefully which will give them a better position for the future.

And secondly, in their relationship with their franchisees, as of April last, they have changed more of the benefits to the franchisees Schuitema so that the franchisees have a better position to compete in the market.

So that’s why you see pressure on the EBIT this year, but the measures they are taking, the management has confidence that they will be measures that will create the value for the next years.

Barbara Ambrus - Landesbank Baden-Wuerttemberg

Thank you.

Operator

Thank you. Our next question comes from John Roeg of ING. Please go ahead.

John Roeg - ING

Hello, everybody. Couple of questions. First, some clarification on the results of the Tops. I found on page 13 of the financial statements that they have a zero result in Q2, but that there is also a note that they have $22 million in charges. So is it fair to assume that they were making let’s say, $50 million profits after tax, so that they are really profitable now again?

And second question is, now that you have decoded to de-list from the New York Stock Exchange and to de-register with the SEC, what does this mean for your disclosure? Will you open up a little bit going forward, or will it become a little bit less? Do you still have to publish 20-Fs. Those are my questions/

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

On the Tops business, in New York, it’s profitable, as you correctly deduced, which is good.

In terms of the reporting requirements, if we de-list from the US, as usual, specific example, we no longer file the 20-F.

John Roeg - ING

Okay, but do you intend to continue to produce a similar detailed figures, as you do it now?

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

Well, we'll produce our annual report as we do. But we will not be filing a 20-F. We will provide the necessary information to ensure what we make the reporting standard under IFRS will be the best.

John Roeg - ING

Okay, thank you.

Operator

Thank you. Robert Vos from Fortis has our next question. Please go ahead.

Robert Vos - Fortis Bank

Yes, good afternoon. I have one question remaining. In the past press releases, on the sales and results you mentioned that there is a negative margin impact from the price investments due to the rollout of VIP. My question is, do you expect this impact to increase further in coming quarters as you further roll out the VIP. That’s was my question. Thank you.

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

Okay, clearly as we rolled out VIP, we have been investing significantly in price and as Larry was saying earlier, we are continuing to roll out VIP, so for the course of the year, we'll be continuing to invest in price.

Robert Vos - Fortis Bank

Okay, thank you.

Operator

Thank you. Our next question comes from John Kershaw of Merrill Lynch, please go ahead.

John Kershaw - Merrill Lynch

Good afternoon, gentlemen. Just two quick ones, if I may. Just following up on in terms of the comments on interest, I think I heard you say that interest on your loan would come down modestly in 2008 and you're guiding to €320 million to €340 million in 2007. That seems very conservative to my mind [ph]. Is that because interest rates have gone up and you are exposed to better interest rate because, John, as you suggest, you will only pay down debt as you go at the moment, until you renegotiate terms and so they will not be the rate you pay down. Is it right what I'm assuming then [ph]?

Second, just get back to VIP, I wondered if we might get more information… I am now expecting to get a new precise figures from Larry, but can you perhaps tell me, when you think the [inaudible] might arrive? Could it transfer to the end of the year, when things are a bit too late on some 60% of VIP, up 9, when it comes through and so we should be seeing volume pick up meaningfully, say in the first quarter.

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

Thanks, John. On interest expense [inaudible] my rating of the rates is even when we try to be helpful and provide some guidance, it doesn’t necessarily say anything helpful. So maybe we could just stick with this year as being the guidance we have given explicitly and say, and we will come back later with a specific guidance on next year. Kimberly, do you have anything?

Kimberly Ross - Deputy Chief Financial Officer

No, I agree.

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

Larry, would you like to--?

Lawrence Benjamin - Chief Executive Officer, U.S. Foodservice

The tipping point, John is something that is hard to predict exactly when it will occur. And if you will look at where we have been and where we are at the end of the first quarter, we had hit about 20% of the store and then we moved up to around 25%. So, we've moved very… we're still only at 25% of the store. We ourselves have modeled when we think this will hit. Also to be clear, each category requires a tremendous amount of work. Some categories are much larger than others. We hit several categories in the second quarter, intended to be smaller categories. As a result the impact of VIP varies from quarter-to-quarter depending upon what percentage of sales we've actually impacted. To date that’s not been level. It was different in the first quarter, than it was in the second quarter. And then as we go out and sell… a lot of it has to do with how much critical mass we hit and also what other things other than pricing are being done to drive price perception. But I think it's important to note that thus far, we have a tremendous amount of work, and I keep using the word, 'unsupported work' we have only impacted 25% of our store.

John Kershaw - Merrill Lynch

Okay, and then just perhaps, to help us [ph], I know it's a completely different market, but could you tell us when you take out [inaudible] and Spain out and I'm just going to come back to… I had a question on current trading. And it's difficult to come in, obviously it has been the sub-prime in the US and… the sub-prime environment in the US, which to be very specific [inaudible] and it’s being profitable like Wal-Mart and the like. Maybe just read me, can you assure us that there's no change due to slightly weaker market trends than you've seen in Q1 or is it incrementally worse?

Lawrence Benjamin - Chief Executive Officer, U.S. Foodservice

Just to be clear on Albert Heijn, could tell you John we have studied very carefully the Albert Heijn repositioning. It was done very differently than we have done roll out in the US retail, the big difference being that Albert Heijn took a significant price reduction across a broad range of categories right out of the box. As I mentioned, the Albert Heijn repositioning was more initially based on price, it was not nearly the assortment. The assortment was already fairly well-trimmed. We have a much larger assortment in the US. It is not strategic issue at home than it is in the US. So very fundamentally different. And as a result a whole tipping point and impact on consumer perception was quite different than we expected in the US and we are planning one in the US. So they’re really not comparable, very different implementation strategies, same end result, how we get there is different.

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

In terms of the outlook, John, we haven’t changed our guidance in terms of the margin for the year. We are at a range of 4% to 4.5% that we are very comfortable with. At the risk of being misquoted, if you are writing [ph] this morning, the other thing that I would add to that is clearly that with the share price turbulence with the sub-prime market, with fuel prices remaining high and with the full inflation, I’m sure there will be some impact on the economy and I’m sure that will impact businesses.

I suspect that at some point there may be some impact on us, but certainly nothing we’re predicting of any significance at present. We happen to be geographically in an area that is better, certainly in terms of the mortgage issues and for many of the other areas in the US. It’s not entirely protected, but it’s certainly better.

We are comfortable with our guidance of 4% to 4.5% and we may live up.

John Kershaw - Merrill Lynch

Okay, thanks a lot, guys.

Operator

Thank you. Mark Haide [ph] of UBS has our next question. Please go ahead.

Unidentified Analyst

Good afternoon, gentlemen. A quick question really. Could you tell us, as of the intermediate time about what sort of credit metrics you’re looking at even in terms of leverage or in terms of gross or net debt over the longer time.

Secondly, to sort of pursue on this debt reduction. You’ve obviously targeted €2 billion. Should we assume that the €110 million of security that you bought back, early this year, is that pretty… as far as it’s gone so far? I mean what degree of progress did you achieve on this debt reduction?

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

I’m going to ask Kim to talk a little bit about the debt reduction. I think that may be helpful to you.

Kimberly Ross – Deputy Chief Financial Officer

Yes, since November when we announced that we would repay €2 billion in debt, we have so far repaid approximately €407 million. Some of that has been in some market repurchases and others have been in debt that has matured during the period. So we had about a €1.6 billion left to go with some maturity this year around €380 million throughout the year. And they will continue to look in the market for which is the best opportunity for us to do the rest of the debt reduction. With regards to credit metrics, I think we’re comfortable in the BBB land and in investment grade and the idea is to stay investment grade going forward.

Mark Haide – UBS

Okay. Do you have any specific gross on that debt target?

Kimberly Ross – Deputy Chief Financial Officer

We said we would target gross debt of €4 billion.

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

And I think the key thing primarily is around maintaining the current level of investments grade that we have at the moment.

Mark Haide – UBS

Okay, well, thank you very much.

Operator

Our final question today comes from Marc De Speville of Redburn. Please go ahead.

Marc De Speville - Redburn

Hi, guys, my questions have been answered. Thanks.

John Rishton - Acting President and Chief Executive Officer and Executive Vice President and Chief Financial Officer

Well, I’d like to say that’s exactly the kind of last question that I like. Thank you very much.

And thank you very much indeed for joining us today. If I could just summarize, I think the results in the quarter were encouraging. I think that it’s very evident that we’re making progress along the path that we laid out. But clearly, as we put in our retail review in November last year, we’ve made clearly good progress on the disposals. We’ve exceeded the amount that we had expected. We beat the timing I think with many people. We continue to make progress on the remaining disposals. We put organization in place, we put people in place, we’re seeing some of the benefits from that. And the [inaudible] there is the Czech Republic.

In terms of VIP, with the price investments that we are making in our business, we are seeing positive results from those. We're highly encouraged by the results that we're seeing, particularly in Shop & Stop and Giant-Landover, where customer perception, as Larry said is changing favorably.

So we’re confident that we're doing the right things, we’re confident that we’re moving in the right direction. We also know we have a lot of work to do and you can be assured that we’ll be very focused on that and continue to work hard across all of the balance.

Thanks very much to you for joining us today.

Operator

Thank you, ladies and gentlemen, that will conclude today’s conference call. Thank you for participating, you may now disconnect.

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